The shock absorbing role of cross-border investments: net positions versus currency composition

Agustín Bénétrix, Beren Demirölmez () and Martin Schmitz

Economic Papers from Trinity College Dublin, Economics Department

Abstract: We present a comprehensive analysis of the shock absorption role of external positions using the currency exposures dataset by B n trix, Gautam, Juvenal, and Schmitz (2020). While the literature has frequently studied how the net international investment position and its currency composition determine the direction and scale of valuation effects, we focus on their amplitude. This is of central importance for global financial stability given the large and increasing scale of external balance sheets. To that end, we propose an indicator showing the extent to which external positions absorb or amplify exchange rate shocks. Analysing a set of 50 countries over the period 1990-2017, we find the external shock absorption role to be present for advanced economies, while this was initially not the case for emerging markets economies (EMEs). In recent years, however, EMEs' external positions increasingly showed a shock absorption capacity. Our regression-based analysis reveals that the level of economic and financial development is associated with a greater capacity to absorb exchange rate shocks.

Keywords: Currency composition; international investment position; foreign currency exposures; valuation effects; global imbalances (search for similar items in EconPapers)
JEL-codes: F21 F31 F32 F41 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2021-06
New Economics Papers: this item is included in nep-fdg, nep-ifn, nep-int and nep-opm
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https://www.tcd.ie/Economics/TEP/2021/TEP0421.pdf

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Journal Article: The Shock Absorbing Role of Cross-border Investments: Net Positions Versus Currency Composition (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:tcd:tcduee:tep0421

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